March 2018

Max Niederhofer recently published this chart showing European exits. As you can see there’s been impressive growth in sub $100m exits, but the story with larger M&A exits and IPOs is less compelling. As I wrote last week our ecosystem is making great progress, but clearly, if we are to keep growing then at some point we need to see an increase in large exits.

The good news is that we can reconcile the facts that we have an increasing number of great companies with the fact that the number of large exits isn’t going up: great companies are staying private for longer. Witness mega rounds by companies like Transferwise and Deliveroo that in years gone past would have had to IPO to raise that kind of cash or, as was more often the case, sell to a larger company that could finance their growth.

This ‘staying private longer’ phenomenon isn’t just a European thing. In the US companies are raising amounts of capital previously only possible through IPO with much greater frequency than they are here. Whether that’s a good or a bad thing is debatable (private companies have less scrutiny and therefore lower costs, but arguably the scrutiny makes them more disciplined) but the important point here is that it’s skewing the exit data. That said, if LPs are to keep making new commitments to fund, they need to get cash back soon, so this trend can’t continue forever.

This week I’ve been at the SuperReturn/SuperVenture conference in Berlin. It’s the biggest European gathering of venture capital fund managers, private equity fund managers and LPs, the institutions that invest in both types of funds. I’ve been going off and on for the last ten years and the good news is that the tide is definitely turning in favour of European venture.

That said, we’re coming from a place where there was very little interest amongst LPs in European funds. For many years our asset class, which is “European venture” was at the bottom of their priority lists. I remember vividly one year, I think it was 2012, when a placement agent (industry jargon for a broker that helps raise private equity and venture funds) had surveyed 83 LPs. He had given them each three votes to cast across about 15 different asset classes. Of the 249 available votes, only 5 were put against European venture. European VCs fundraising at that time were fishing in a very small pond…

As I say though, things have been getting better for a while. The logic in favour of European venture was always strong. VC investment per capita is lower than the US (it’s now 33% lower) and enterprise spend on technology here is much higher as a ratio to VC investment than it is elsewhere in the world. Efficient market theory has it that money should flow into that void.

The problem has been that many LPs lost money in European venture in the 1999-2000, were nervous about making the same mistake again, and wondered if there was a structural reason why venture capitalists seemed to be less successful here than in the US. Structural reasons mooted included an absence of serial entrepreneurs, insufficient venture capital to scale businesses properly, lack of ambition and the fear of failure.

However, whilst money didn’t flood into the void, it did trickle. Governments around Europe played their part, funding the EIF and domestically here in the UK the British Business Bank, and a few brave LPs were prepared to walk where others feared to tread.

And with that capital, a few entrepreneurs succeeded against odds that were much tougher than they would have faced in the Valley. They became serial entrepreneurs, attracting more venture capital into the market, enabling us to fund businesses more aggressively, which in turn drove returns higher. We entered a virtuous spiral and if there was ever a lack of ambition or too high a fear of failure nobody is talking about it anymore.

That virtuous spiral has been turning slowly for a while now and the result has encouraging growth in capital invested into European startups and raised by European venture funds. Different data sources vary, but I think the Dealroom data you see in the chart below is pretty close to the truth.

However, what most of us in the industry would like is for the virtuous spiral to turn faster. I think we could comfortably deploy more capital into more companies and grow them more aggressively and reach bigger outcomes without the market getting overheated.

As I wrote recently to an active investor in venture, the input metrics of funds raised and dollars deployed are very healthy, but we don’t yet have published written evidence that all this activity is translating into great returns for LPs. The fact that commitments to venture funds are rising implies that the returns are there, or at least that LPs believe they are coming, but we haven’t yet seen that in industry stats.

What we do have now is active venture LPs saying publicly that they are making good returns from European venture and that those returns are getting better every year. We heard that at SuperVenture this week, and that’s a first for me in 18 years in this game.

We also had LPs who have historically invested in private equity but not venture questioning whether it was time for them to make a change.

So I think the chances are good that the growth in our ecosystem will accelerate. I can’t remember feeling this optimistic about our collective prospects.